The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

[FlagDUDE08]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

At the risk of splitting hairs, why not?

Churchill famously cracked that democracy is the worst form of government except for all the others. Likewise, it seems to me, with mortgages. Never mind the zero-down, interest-only bubble nonsense. Just a regular old long-term fixed-rate mortgage with a solid down payment.

The alternatives to a mortgage are not mutual funds, futures contracts, bonds, or whatever. If we set aside Mom's basement and being born with a nice trust, the only alternative is renting. Considering that rent is often higher than a mortgage payment, and it's a monthly expense you're going to face, anyway (read: low, low opportunity cost), you could make an argument that a (well-planned) mortgage is one of the best investment decisions a young person can make.

Rent higher than mortgage?! Where the hell are YOU living?!

Houses depreciate. Sure the appraisal values can be higher, but what do you have to put into them to get there? Typically more than you get out. That's not an investment, that's a loss. Not to mention the taxes already mentioned.

 

[amherstblackbear]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

It depends on how much of a wizard you are at investing, I guess. What annual rate of return can you assume?

On a 150k purchase, with 120k financed, at 4% over 30yrs, you're looking at $573/mo, $206k total payments.
Renting that thing might cost $1k/mo now, with yearly increases at, say, 3.5%. Total payments in this scenario are $620k

You can't "solve" the equation without filling in other parameters, like appreciation (+), maintenance (-), taxes (property -, income +), etc. But that's a heck of a spread. A rough guesstimate is that you'll need an actual investment to yield an average annual return (pre-tax) of somewhere in the neighborhood of 13-15% to break even. Maybe less if you buy a money pit. Maybe more if home values appreciate faster than inflation (who knows).

Which is why I'm less interested in splitting hairs about what, exactly, is an investment. To me, any strategic choice involving present expense, opportunity costs, and a best guess of long-term return qualifies. YMMV.

 

[amherstblackbear]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

Rent higher than mortgage?! Where the hell are YOU living?!

Houses depreciate. Sure the appraisal values can be higher, but what do you have to put into them to get there? Typically more than you get out. That's not an investment, that's a loss. Not to mention the taxes already mentioned.

Currently shopping for houses in the midwest, comparing costs of purchasing a house to renting a house (I'm not going to compare apples and oranges, and compare some crappy undergrad tenement to a newly-constructed McMansion). Also taking into account that I can get a 30yr mortgage for a hair over 3.5%.

 

[FlagDUDE08]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

Currently shopping for houses in the midwest, comparing costs of purchasing a house to renting a house (I'm not going to compare apples and oranges, and compare some crappy undergrad tenement to a newly-constructed McMansion). Also taking into account that I can get a 30yr mortgage for a hair over 3.5%.

In Western NY, house prices were so low that they went up during the housing bust of 2006. Of course property tax is practically at 100% in this state (not really, but **** close enough). Rent's REALLY cheap here, too. 2-bedroom apartment, over 900 sq. ft, under 800 bucks a month, plus electric (and cable if you choose to get it).

 

[amherstblackbear]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

For me, the table is tilted even more toward purchasing. The place where I'm moving, I can get a *nice* Victorian or Colonial for about 135k. Home values are that low right now. Renting a house will be anywhere between 800 (ranch) - 1100 (various 2-story). I'm guessing rents are kept artificially high by continuous student demand. Property taxes on a first property are nearly nonexistent with the homestead exemption.

Maybe it's more of a no-brainer to buy in my situation than it is in some others.

 

[FlagDUDE08]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

For me, the table is tilted even more toward purchasing. The place where I'm moving, I can get a *nice* Victorian or Colonial for about 135k. Home values are that low right now. Renting a house will be anywhere between 800 (ranch) - 1100 (various 2-story). I'm guessing rents are kept artificially high by continuous student demand. Property taxes on a first property are nearly nonexistent with the homestead exemption.

Maybe it's more of a no-brainer to buy in my situation than it is in some others.

If property tax rates are good in the midwest, then yes. Out here in the east (especially NY and NH), they're a nightmare, so it makes more sense to rent. Obviously there's also the caveat that you can itemise property taxes and mortgages (although I think only the interest); assuming $750/month rent and this past tax season's deductions as a single person, you'd lose $3300 federally, $1500 in NYS by taking the standard deduction; you pay more than that in property taxes here.

 

[Bob Gray]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

Rent higher than mortgage?! Where the hell are YOU living?!

Houses depreciate. Sure the appraisal values can be higher, but what do you have to put into them to get there? Typically more than you get out. That's not an investment, that's a loss. Not to mention the taxes already mentioned.

Rental rates have been higher than a comparable mortgage for awhile now here in Phoenix. We bought a nice house in January and are thrilled to be paying much lower monthly costs in our house than what we were paying for rent for our apartment the previous 8 months or so while we were househunting. We got a lot less apartment, a paying a lot more. We now have a lot more house, and are paying a lot less. And I've heard similar stories from others in the Phoenix area. Of course that'll happen when your real estate values go down 50 percent or so in the last few years (though the market is actually starting to rebound here). Buying an existing house here is generally well below the cost of new construction.

 

[Almington]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

Regardless of if it is better to rent or buy (which is going to be a very location and market dependent analysis), a house is still NOT an investment. Housing is an expense and it is nearly impossible to get more money out of your primary residence then was put into it (it is absolutely impossible to get more out of a rented place than was put into it). There are plenty of good reasons to purchase a home but being a good investment is not one of them. At best, a house is a forced savings instrument.

 

[amherstblackbear]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

Now we're really splitting hairs.

So I have 30k in liquid assets, and what I do with them is determined by my housing strategy. If I rent, then I (re)invest those funds. If I buy, I force-save(?) those funds by using them as a down payment.

Or, in my terms, I invest those funds in a mortgage down payment that substantially reduces my monthly housing payments for the next 30 years, freeing up funds to . . . wait for it . . . invest.

I get what you're saying. The clapboard and concrete is not the investment. The decision to take present funds away from "pure" market instruments and put them towards obtaining a real asset that has the side effect of reducing monthly housing payments over the 30 years, and eventually culminates in ownership of a tradeable asset . . . that's as near an investment as makes no difference, to my way of thinking.

But reasonable people can disagree.

 

[Bob Gray]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

Regardless of if it is better to rent or buy (which is going to be a very location and market dependent analysis), a house is still NOT an investment. Housing is an expense and it is nearly impossible to get more money out of your primary residence then was put into it (it is absolutely impossible to get more out of a rented place than was put into it). There are plenty of good reasons to purchase a home but being a good investment is not one of them. At best, a house is a forced savings instrument.

Or maybe another way of thinking of it is a house is a forced investment. It is an investment, as it's where a good chunk of your assets may sit (or become a liability of one ends up upside down), so I think it's important to think of it at least somewhat as an investment, while recognizing that if it's where you live you it's also important how you enjoy the place.

 

[French Rage]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

The place where I'm moving, I can get a *nice* Victorian or Colonial for about 135k.

I hate you. In the Bay Area, an outhouse costs more than $200k.

 

[Almington]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

Now we're really splitting hairs.

So I have 30k in liquid assets, and what I do with them is determined by my housing strategy. If I rent, then I (re)invest those funds. If I buy, I force-save(?) those funds by using them as a down payment.

Or, in my terms, I invest those funds in a mortgage down payment that substantially reduces my monthly housing payments for the next 30 years, freeing up funds to . . . wait for it . . . invest.

I get what you're saying. The clapboard and concrete is not the investment. The decision to take present funds away from "pure" market instruments and put them towards obtaining a real asset that has the side effect of reducing monthly housing payments over the 30 years, and eventually culminates in ownership of a tradeable asset . . . that's as near an investment as makes no difference, to my way of thinking.

But reasonable people can disagree.

A simplified illustrative example (I hope):

You buy a house, over 30 years that house costs you $400k (in today's dollars) to cover the cost of the down payment, mortgage, insurance, taxes, and maintenance. After 30 years you have an asset that is worth $250k (also in today's dollars). Overall, the value of the house is worth $150k less than you spent on it. Not a great investment, but your net housing costs are only $5k/year (in today's dollars).

I chose to rent for 30 years and spend the same $400k (in today's dollars) in rent over that period and have no asset to show for it. My annual housing costs are $13.5k/year (in today's dollars).

In this example, buying the house is a much better financial choice as the renter's average net housing costs are more than 2.5x what the home buyers net costs were were in spite of the fact that our expenditures were exactly the same That's what I mean by "forced" savings, the simple act of paying the mortgage and having somewhere to live is forcing buyer to save by building equity in the house, the renter, to have the same $250k in assets after 30 years, has to be diligent about actively saving.

Of course this simplifies the mathematics, the reality of the situation depends exactly on WHEN the expenditures are made, the buyer has higher up front costs (with the down payment) and the renter has much higher costs towards the end of the period (were inflation has reduced the real value of the mortgage payment).

Basically any "savings" that the renter might realize from initially lower costs and no down payment is much more likely to be spent on living a higher lifestyle (rather than invested) or eaten by higher rental costs in the future than the equity that the buyer is building in the home.

The biggest advantage of buying is that it "locks in" your housing costs for a long period and is effectively a hedge against increasing housing costs in the future (ignoring major maintenance costs: new HVAC system, roof, remodel, addition which the owners have some control over the timing of)

 

[French Rage]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

In this example, buying the house is a much better financial choice as the renter's average net housing costs are more than 2.5x what the home buyers net costs were were in spite of the fact that our expenditures were exactly the same That's what I mean by "forced" savings, the simple act of paying the mortgage and having somewhere to live is forcing buyer to save by building equity in the house, the renter, to have the same $250k in assets after 30 years, has to be diligent about actively saving.

Furthermore, at some point the buyer pays off the mortgage and therefore no longer has that expense, whereas the renter will continue to pay, so the difference will grow as time progresses. Not to say that the buyer will not have other upkeep expenses to worry about though.

 

[Almington]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

Furthermore, at some point the buyer pays off the mortgage and therefore no longer has that expense, whereas the renter will continue to pay, so the difference will grow as time progresses. Not to say that the buyer will not have other upkeep expenses to worry about though.

That assumes that the buyer stays in the same home long enough to pay off the mortgage (or doesn't pull out the equity to pay for an addition or the children's college education).

Generally, the longer you live someplace, the more sense it makes to purchase.

 

[French Rage]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

That assumes that the buyer stays in the same home long enough to pay off the mortgage (or doesn't pull out the equity to pay for an addition or the children's college education).

Generally, the longer you live someplace, the more sense it makes to purchase.

True. It also depends on what you do with the money you pull out of the equity. If you move and put it in another place, it's still going toward eventually not having to pay to live somewhere. If it goes to childrens' education or a new boat, not so much (not that the former isn't a good thing).

 

[LynahFan]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

Its not the same for kids as it is for you, or even myself. For one thing, they are mired in debt from college. Figures I have heard range from 40,000 all the way to 200,000 dollars in debt. The fact is that most kids are paycheck to paycheck and would have to get more credit to afford a slight emergency. The mere ability for a kid to get a savings account ( read something more liquid than a 401k, and less volatile than large caps) is impressive. My first goal was to get a 6 month emergency fund regardless of the rate. Being able to rest at night knowing that a few bumps in the road won't affect me go a long way.

It's been a few days now, but I'm pretty sure that the point of the NPR poll was where young people *would* invest if they had the money, not where they were putting their actual (probably non-existent) savings. I agree about the emergency fund, and an FDIC-insured savings account is certainly not a bad place to keep that - but that's not an investment, as far as I'm concerned.

The question is: if you already have your emergency fund and inherited an extra $10k, where would you invest it? Savings account shouldn't even be on the list, much less at the top.

 

[Bob Gray]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

A huge intangible, which some may value more than others, is when you buy and live in a home, it's really your place. You can really make it yours and not have to deal with a landlord or whoever. Plus, if comparing renting an apartment to owning a home, you generally have more space/privacy with your home and don't have to deal with apartment management (we didn't enjoy that in our recent apartment complex sojourn).

 

[Almington]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

The question is: if you already have your emergency fund and inherited an extra $10k, where would you invest it? Savings account shouldn't even be on the list, much less at the top.

I fear that most wouldn't think "how should I invest this money" but rather "What stuff can I buy with this money"

A huge intangible, which some may value more than others, is when you buy and live in a home, it's really your place. You can really make it yours and not have to deal with a landlord or whoever. Plus, if comparing renting an apartment to owning a home, you generally have more space/privacy with your home and don't have to deal with apartment management (we didn't enjoy that in our recent apartment complex sojourn).

I agree that the factors that go into the buy vs rent decision go beyond simple economics, that still doesn't make a home purchase an investment.

 

[FlagDUDE08]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

It's been a few days now, but I'm pretty sure that the point of the NPR poll was where young people *would* invest if they had the money, not where they were putting their actual (probably non-existent) savings. I agree about the emergency fund, and an FDIC-insured savings account is certainly not a bad place to keep that - but that's not an investment, as far as I'm concerned.

The question is: if you already have your emergency fund and inherited an extra $10k, where would you invest it? Savings account shouldn't even be on the list, much less at the top.

Car? Vacation? Boob job?

"I consider it an investment, because all of the drinks that are bought for me because I have big boobs will help pay for the boob job." --some woman on "Beauty and the Geek"

I'd throw most at a loan. However now that I don't have any, I'd put most (if not all) in the stock market.

 

[Bob Gray]

Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...

I agree that the factors that go into the buy vs rent decision go beyond simple economics, that still doesn't make a home purchase an investment.

I understand what you're saying, but at the end of the day, anything you sink such a huge chunk of money into has to be viewed at least partially through the lens of considering it an investment. We bought a house recently, and us thinking we'd like living there was a major factor, but also getting a good price, being in a place where it will hold its value, etc. also factored into our considerations. It's not an either or situation.